Global Debt and Third World DevelopmentBy Vincent Ferraro and Melissa RosserFrom: World Security: Challenges for a New Century,
edited by Michael Klare and Daniel Thomas (New York: St. Martin's Press, 1994), pp.
332-355

In 1919, writing about a massive debt imposed upon Germany by the Allied Powers as
reparations for a catastrophic war, John Maynard Keynes expressed contempt for the wisdom
of the policy:

The policy of reducing Germany to servitude for a generation, of degrading the lives of
millions of human beings, and of depriving a whole nation of happiness should be abhorrent
and detestable - abhorrent and detestable, even if it were possible, even if it enriched
ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some
preach it in the name of justice. In the great events of man's history, in the unwinding
of the complex fates of nations Justice is not so simple. And if it were, nations are not
authorized, by religion or by natural morals, to visit on the children of their enemies
the misdoings of parents or of rulers.1

Twenty years later, the debt, partially responsible for the rise of the Nazis, had been
repudiated and Keynes's views had been confirmed.

Seventy-four years later, the world confronts another massive debt, although not one
imposed by a treaty of peace. Indeed, this debt, totaling $1.362 trillion in 1991, has no
identifiable demons: One cannot point to the vindictiveness of a Clemenceau, or the
opportunism of a Lloyd George, or the naive idealism of a Wilson. Nonetheless, this debt
has had the effect of plunging millions of people into conditions of economic despair and
desperation. Most tragically, this debt will jeopardize the chances for the happiness of
millions of children who will have committed no crime other than that of being born into a
poor society. Ultimately, this debt, like the German debt, will not be repaid in full.

This chapter will examine the causes and consequences of the global debt crisis. It
begins by first defining the crisis and then develops an explanation for the crisis from
two perspectives: first, a general explanation based upon the desperate economic
conditions that characterize developing countries; and second, an explanation of the more
specific reasons why poorer countries expanded their debt burdens so dramatically in the
1970s. The chapter then examines the costs of the debt crisis to both developing and
developed countries, and pays some close attention to the possibility of an international
banking collapse in the early 1980s. Finally, the chapter reviews some general solutions
to the debt crisis and offers suggestions for future responses.

What is the "Debt Crisis?"

To be fully accurate, one should refer to the multiple debt crises that exist in the
world today. For our purposes, however, the "debt crisis" will refer the
external debt, both private and public, of developing countries, which has been growing
enormously since the early 1970s. Our focus should obscure, however, the other debt crises
that trouble much of the global economy: the budget deficits of the United States
government, its balance trade deficits, and the insolvency of many of its savings and
loans institutions. These crises are highly interconnected, particularly as they relate
the issues of interest rates, export values, and confidence in the international banking
system. The "debt crisis," then, is a global phenomenon, and a attempt to
understand it fully needs a global perspective.

However, the greatest suffering thus far in the crisis is found within developing
countries, and therein lies the justification for our focus. But even within the
developing world, our attention can be directed toward a variety of problems depending on
how one chooses to think about debt. One can focus on the integrity of the international
financial system, in which case one's emphasis is on the countries with the largest debts,
such as Mexico or Brazil. Alternatively, a primary concern can be on the desperate human
costs of the debt, which would direct attention to sub-Saharan Africa, for example. Yet
another perspective, the strategic dimensions of the problem, would concentrate on debtors
such as Turkey or South Korea.

We will pay primary attention to what have been termed the most heavily indebted
nations within the developing countries. This focus is not neutral, since it generally
refers to those nations with the largest debts a whose threat of default represents a
serious concern to lending agencies.2
The bias of the focus, however, should not divert attention from the smaller countries,
particularly those in Africa, whose debts are crushingly large to their people, even
though the banks and international lending agencies consider them less important or less
threatening.3

The accelerating magnitude of debt for the most heavily indebted nations is staggering.
In 1970, the fifteen heavily indebted nations (using the World Bank classification of 1989
- see note 2) had an external public debt of $17.923 billion - which amounted to 9.8
percent of their GNP. By 1987, these same nations owed $402.171 billion, or 47.5 percent
of their GNP. Interest payments owed by these countries went from $2.789 billion in 1970
to $36.251 billion in 1987. Debt service, defined as the sum of actual repayments of
principal and actual payments of interest made in foreign currencies, goods, or services
on external public and publicly guaranteed debt, accounted for 1.5 percent of their GNP
and 12.4 percent of their to exports of goods and services in 1970. In 1987, those figures
had risen 4.3 percent and 24.9 percent, respectively.4
Table 17.1 gives the statistics using the World Bank's 1992 classification of heavily
indebted countries.

For the developing world as a whole, in 1991, the total external debt was $1.362
trillion, which was 126.5 percent of its total exports of goods and services in that year,
and the ratio of debt servicing to the gross domestic product of the developing world
reached 32.4 percent.5

The Causes of the Debt Crisis: (1) Poverty as a
General Motive for Borrowing

The economic debts of the developing world will not be fully repaid, quite simply
because the people who live in the developing world cannot afford to repay them. The harsh
reality of poverty in poorer countries was an initial stimulus for the loans. As we shall
see below, economic conditions suggested that borrowing money was a reasonable course of
action in the 1970s, particularly for poor countries, which perceived few, if any,
alternative ways to address the economic plight of their citizens. Those who live in the
rich countries of the developed world can readily observe profound poverty: all who live
in the wealthy, industrialized nations do not have equal access to education, health care,
good nutrition, and housing. The fact that these deprivations exist alongside great wealth
is shocking, but they pale when compared to the scale of global poverty. The hunger,
homelessness, illness, and suffering of the poor in the developed countries must be
multiplied a thousand times, in some respects a million times, to begin to reflect the
scope of poverty in the world's poorest nations. In 1987, the average per capita income
for people living in the poor countries in the South was only 6 percent of the income in
the developed countries of the North. In Africa, one-fifth of the population lives in
poverty, with those in sub-Saharan Africa bearing the heaviest burden.6 A child in the developing world suffers a risk of death four
to ten times greater than that of a child in Western Europe or North America. A pregnant
woman in the developing world is 50 to 100 times more likely to die in childbirth than
women in the wealthy, developed nations.7

Despite the overwhelming number of statistics and indicators, global poverty is as hard
to measure as it is to conceptualize. Although it is simple to characterize abstractly the
living conditions of the world's impoverished population, there is no widely accepted,
standard method of identifying the poor, and, therefore, of measuring the exact extent of
global poverty. Economists, social scientists, politicians, and agencies for international
aid each advocate their own particular definition of poverty depending upon the interests,
whether noble or self-serving, which they are protecting or pursuing. Nonetheless,
whatever the bias of the analyst or the method used to estimate the number of global poor,
the statistics are appallingly high, almost beyond comprehension. Consider, for example,
these estimates taken from the September 1990 UN Chronicle (p. 46):

1 billion people live in absolute poverty

100 million persons are completely homeless

800 million persons go hungry every day

1.75 billion people are without access to safe drinking water

1.5 billion persons are without access to primary health care

The central debate concerning the definition of poverty centers around the two most
prominent types of measurements: income analysis and basic needs analysis. Income
analysis, the most common measure of poverty, assumes that poverty is a direct function of
income and individual purchasing power within nations. It argues that citizens with a
higher income should have greater access to goods and services that will satisfy their
basic needs. The countries with a higher GNP and GNP per capita presumably will have a
proportionally higher standard of living for all their citizens. Consequently, the income
analysis approach uses a cross-national comparison of GNP, GNP per capita, and GDP (gross
domestic product) statistics to define poverty. In 1990, the World Bank's definition of
poverty was all of the world's population living on less than $370 a year; a figure
derived from the average of the poverty lines of the poorest nations in the world. By this
criteria, over 20 percent of the world's population live in poverty.

The relative ease with which GNP and related economic indicators can be calculated, and
the ability to set an actual "poverty line" based upon these "hard"
figures, are attractive features of the income analysis method. However, the method has
many hidden weaknesses. First, despite the seemingly accurate nature of the income
definition of poverty, it is, in fact, based upon averages. For instance, the GNP per
capita indicator measures the average income of each person in a nation by dividing the
total gross national product by the total population. It is a highly inaccurate
measurement because it does not consider the unequal distribution of wealth within the
country. Many people in developing nations do not live within the organized market
economy, and, in many countries, a rigid class and social structure prevents the
integration of the poor into the economic activity of the country as a whole. Most of the
very poor meet their needs through subsistence methods, such as farming, hunting, and
bartering. The national income has no direct, or even indirect, effect on their existence,
and a money income definition of poverty will not reflect their standard of living
whatsoever.

The basic needs approach to the definition of poverty conceptualizes poverty
differently. It is not a lack of money that causes people to live impoverished lives, it
is a lack of food, shelter, education, sanitation, safe drinking water, and health care.
Basic needs analysis sets a minimum standard for each of these life-sustaining variables
and classifies as poor those who have access to less than a minimum allowance. The picture
of the impoverished, according to the basic needs analysis, is one who is malnourished,
illiterate, short-lived, sickly, and lacking proper shelter and sanitation. The poorest
nations, as ranked by a basic needs index, are those who do not provide for the basic
needs of their people. Significantly, they are not always the nations with the lowest GNP.
For example, Sri Lanka is ranked 120th in the world by per capita GNP, but is listed as
75th in the United Nation's 1990 Human Development Report (which ranks countries by the
HDI or Human Development Index), well above the United Arab Emirates, whose real GDP per
capita is six times that of Sri Lanka.8

Although the basic needs analysis illustrates the living conditions of the world's
poorest people better than a simple income definition, it, too, has its drawbacks as a
method for measuring the extent of poverty in the world. The data for basic needs analysis
is extremely difficult to collect. An accurate study is a time-consuming, expensive, and
meticulous undertaking. Consequently, basic needs analysis often relies upon rough
estimates and averages and even some income-related data. In addition, the categories of
basic need and their importance relative to one another are somewhat subjective.

Creating a definitive way of calculating global poverty is much more than merely a
matter of precision or exactitude. The way one defines poverty has a decisive impact on
the kinds of policies that are chosen to combat it. Those who use income analysis regard
economic growth as the answer to world poverty. This method of analysis depends on the
theory of "trickledown economics," that is, any increase in the productivity and
relative wealth of a nation will eventually trickle down to benefit every sector of a
country's economy and, consequently, each family unit and individual. The World Bank, for
instance, implements economic recovery programs and internal structural readjustments to
help poor nations increase the rate of growth in their GNPs, and ostensibly raise the
standards of living in their society. Those who favor the basic needs analysis do not
think that national economic growth is enough to eradicate world poverty, and, rather,
emphasize questions of how that growth is distributed. They cite evidence that few of the
benefits of increased productivity ever reach the most disadvantaged in low-income
countries, and, therefore, advocate programs that directly target the poor and their
suffering by subsidizing and redistributing basic needs and services. Such programs
include vaccination and health outreach services, nutritional supplements, campaigns
against illiteracy, infant and maternal mortality, and the problems of sanitation and
clean water resources.

Regardless of the method of calculation, it is clear that many people in the world are
suffering needlessly and living lives of wretched deprivation. This is especially true for
women and children in the developing world. Women and children are the most vulnerable
members of any society, but they are the principal victims of poverty. Females as a group,
in poor regions, regardless of age, receive less education, less health care, and less
food than men or male children. The female literacy rate in the developing world is
three-quarters that of the male literacy rate. Women work, on average, twice as many
hours, including the unpaid labor of subsistence farming, gathering, and caring for the
young, the old, and the ill.9 Due to
poorer nutrition, hard labor, lack of professional health care, and unsanitary living
conditions, women in the developing world account for 99 percent of maternal deaths
worldwide.10 The health of children is
even more threatened. Every six seconds, a child dies and another is disabled by a disease
for which there is already an effective immunization. Each year seventeen million children
die from the combined effects of poor nutrition, diarrhea, malaria, pneumonia, measles,
whooping cough, and tetanus, diseases that are rarely fatal in the developed countries.
One in twenty of these impoverished children dies before reaching the age of five."11

These are the conditions that cause nations to borrow. There were, however, specific
economic conditions in the 1970s that led to a massive explosion of the debt burden of
developing countries. The tragedy of the debt crisis is that this borrowing only made the
suffering significantly worse.

The Causes of the Debt Crisis: (2) The Specific
Economic Conditions of the 1970s

The conventional explanation is that the debt crisis of the 1980s was due to a number
of highly contingent circumstances that were essentially unpredictable at the time many of
these loans were made. For example, William R. Cline of the Institute for International
Economics summarized the causes as follows:

The external debt crisis that emerged in many developing countries in 1982 can be
traced to higher oil prices in 1973-74 and 1979-80, high interest rates in 1980-82,
declining export prices and volume associated with global recession in 1981-82, problems
of domestic economic management, and an adverse psychological shift in the credit markets.12

The story actually begins earlier than 1973 because debt has been solidly entrenched in
the finances of developing countries for many years. The United States was a heavily
indebted country in the nineteenth century, and poorer countries have always needed
outside infusions of investment capital in order to develop their resources. The logic of
indebtedness is commonplace and not especially arcane: one incurs a debt in hopes of
making an investment that will produce enough money both to pay off the debt and to
generate economic growth that is self-sustaining. An important characteristic of
developing-country debt prior to 1973 was that it was largely financed through public
agencies, both bilateral and multilateral. These agencies, such as the World Bank,
presumably guided the investments toward projects that held out genuine promise of
economic viability and success.

After the oil crisis of 1973-74, however, many commercial banks found themselves awash
with "petrodollars" from some oil-producing states, and these private banks were
eager to put this windfall capital to productive use. The banks assumed that sovereign
debt was a good risk since there was a prevalent belief that countries would not default.13 Many developing countries, reeling from
oil price increases, were eager to receive these loans. These countries assumed that loans
were an intelligent way to ease the trauma of the oil price increases, particularly given
the very high inflation rates at the time. Other developing countries, the oil-exporting
ones (Colombia, Ecuador, Mexico, Nigeria, and Venezuela, for example), saw the loans as a
way to capitalize on their much-improved financial status, and they assumed that oil
prices would remain high in real terms for an extended period of time.

In retrospect, it is easy to point out that these actions did not conform to the
typical logic of indebtedness. These loans were being used to pay for current consumption,
not for productive investments. The money was not being used to mobilize underutilized
resources, but rather to maintain a current, albeit desperate, standard of living.
Moreover, these loans were being made in an unstable economic environment: since the
unraveling of the Bretton Woods Agreement in 1971 (precipitated by the U.S. termination of
the gold standard), global economic relationships had been steadily worsening. The
developing countries began to experience a long-term, secular decline in demand for their
products as the developed countries tightened their economic belts in order to pay for oil
and as they initiated tariffs and quotas to reduce their balance of payments deficits.

The proof of the wrongheadedness of the lending in the 1970s became dramatically
apparent in 1981. Interest rates shot up, and global demand for exports from developing
countries plummeted. The very deep global recession of 1981-82 made it impossible for
developing countries to generate sufficient income to pay back their loans on schedule.
According to the United Nations Conference on Trade and Development (UNCTAD), commodity
prices (for essentially foodstuffs, fuels, minerals, and metals) dropped 28 percent in
1981-82, and between 1980 and 1982 interest payments on loans increased by 50 percent in
nominal terms and 75 percent in real terms.14
In 1982, Mexico came to the brink of what everyone had thought impossible just two years
earlier - a default.15 This critical
situation marked the beginning of what is conventionally termed "the debt
crisis." Private banks abruptly disengaged from further lending because the risks
were too great. In order to prevent a panic, which might have had the effect of unraveling
the entire international financial system, a number of governmental and intergovernmental
agencies, led by the United States, stepped in to assure the continued repayment of the
Mexican loans.

At this same time, the International Monetary Fund (IMF) emerged as the guarantor of
the creditworthiness of developing countries. The IMF had performed this role in the past,
but primarily with regard to its "own" money - that is, money lent by the IMF to
assist countries in addressing balance of payments problems. This new emphasis on creating
conditions primarily to assure payments to private institutions, while in theory not a new
undertaking, was different in character and content from what the IMF had done in the
past, largely because of the enormous amount of money involved. Unfortunately, the IMF, in
spite of the unprecedented situation, did not perceive that its responsibilities had
changed in any significant way, and gave its seal of approval for additional loans only to
those countries that accepted its traditional policies, which are generally referred to as
stabilization programs of "structural adjustment."

Programs of structural adjustment are designed to address balance of payments problems
that are largely internally generated by high inflation rates, large budget deficits, or
structural impediments to the efficient allocation of resources, such as tariffs or
subsidies. The IMF structural adjustment programs highlight "productive capacity as
critical to economic performance" and emphasize "measures to raise the economy's
output potential and to increase the flexibility of factor and goods markets."16 A fundamental assumption in a
structural adjustment program is that current consumption must be suppressed so that
capital can be diverted into more productive domestic investments. A further assumption of
an IMF stabilization program is that exposure to international competition in investment
and trade can enhance the efficiency of local production. In practice, these programs
involve reduced food and transportation subsidies, public sector layoffs, curbs on
government spending, and higher interest and tax rates.17
These actions typically affect the poorer members of society disproportionately hard.18

When one is dealing with a particularly inefficient economic system, structural
adjustment is perhaps acceptable medicine; and there were many examples of gross
inefficiency, not to mention outright corruption, in many of the countries that were
soliciting IMF assistance. In this respect, the IMF programs were probably regarded as the
correct approach by the public and private agencies that were being asked to reschedule or
roll over loans. But the critical difference between the traditional IMF role and its new
role as guarantor of creditworthiness is that the suppression of demand, previously
designed to free capital for domestic investment, simply freed capital to leave the
country.

Moreover, the approach assumes that it was primarily inefficient economic management in
the developing countries that led to the debt crisis. From this point of view, the
developing countries had gorged themselves on easy money in the 1970s, with the debt
crisis being the rough equivalent of a fiscal hangover. Indeed, according to Stephen
Haggard, the IMF believed that a large majority of the failures of adjustment programs
were due to "political constraints" or "weak administrative systems,"
as opposed to external constraints that were largely beyond the control of the developing
countries, for example, high interest rates.19

It is extraordinarily difficult to determine the validity of this perspective. Clearly,
some loans have been used in inappropriate ways.20
Nonetheless, developing countries cannot be accused of fiscal irresponsibility in such
matters as the increase 'in interest rates or the global recession in 1981-82. The
assessment of culpability is in some respects crucial and in other respects irrelevant:
crucial, because one would like to understand the crisis so that a repetition of a similar
crisis can be avoided in the future; irrelevant, because the current situation is so
desperate that solutions must be found no matter where the blame for the crisis actually
lies. In the final analysis, blame rests on a system of finance that allowed developing
countries and banks to engage in transactions reasonable only in the context of wildly
optimistic scenarios of economic growth. Additionally, much blame rests on policies of the
United States government that were undertaken with insufficient regard for their
international financial implications.

William Cline attempted to distinguish between the internal and external causes of the
debt crisis by looking at figures for the effects of oil price and interest rate increases
in order to determine the degree to which each were responsible for the crisis. His
figures, reproduced in Table 17.2, should be treated as only suggestive because there is a
high degree of "double counting" (loans were taken out in some cases to cover
earlier loans) in many of these figures. Nonetheless, as a rough approximation, the data
suggest that external factors were significantly more important than the internal causes
of inefficiency and corruption.

The IMF stabilization programs, with their nearly exclusive emphasis on the internal
economic policies of heavily indebted countries and relative disregard for the factors
that Cline identifies, have failed to encourage the very type of economic growth that
might have helped the developing countries to grow out of their indebtedness. In fact,
these programs have had exactly the opposite effect: they have further impoverished many
of the heavily indebted countries to a point where their future economic growth must be
seriously doubted. Many observers have come to share Jeffrey Sachs's assessment of
structural adjustment programs: "The sobering point is that programs of this sort
have been adopted repeatedly, and have failed repeatedly."21

This failure of traditional techniques to alleviate the debt problem suggests that
perhaps the conventional interpretation of the debt crisis is incomplete or misleading.
Indeed, much evidence suggests this inference. Perhaps the most compelling evidence is the
fact that periodic debt crises seem to be endemic to the modern international system.
There have been cycles of debt and default in the past, and some of the same debtors have
experienced similar crises in almost regular cycles.22
Thus, the debt crisis of the 1980s cannot be ascribed solely to the contingent
circumstances of oil prices and U.S. monetary and fiscal policy, at least as the
conventional perspective portrays these factors. This explanation must be supplemented by
factors that are more structural and deep-seated.

There are at least two issues relatively unexplored by the conventional explanation of
the debt crisis that deserve greater attention, and they both relate to the vulnerability
of the developing countries to changes in the world economy over which they have little
direct control: their sensitivity to monetary changes in the advanced industrialized
countries, and their dependence on primary commodities as sources of their export
earnings. The first consideration is perhaps the more dramatic.

It is no mere coincidence that the United States experienced its own very serious debt
crisis in the same year that panic arose over the external debt of developing countries.23 The massive government debt of the
United States and its related balance of trade deficit precipitated a deliberate strategy
of economic contraction that had global effects. Interest rates in the United States had
achieved very high levels in 1979, but the inflation rates at the time were also very
high. After the deep economic recession of 1981-82, the inflation rate declined markedly,
but the interest rates remained high.24
Interest rates remained high because they were necessary to attract foreign investments to
finance the extraordinary U.S. budget deficits created by the tax reductions pushed by the
Reagan administration and passed by the Congress. In turn, the high interest rates
inflated the value of the dollar, reducing U.S. demand for developing-country exports and
further diminishing the ability of the indebted countries to repay their loans.

The United States, however, did not experience a debt "crisis" because it was
able to reassure its creditors that its promises to pay were plausible. But the high real
interest rates forced upon the developing countries as their loans were turned over
created a situation where no similar guarantees could be offered. As it became obvious
that the debtor countries could not meet the increased payments, the private banks tried
to pull back, bringing about the very crisis they wished to avoid. Only very persistent
efforts by official governmental agencies managed to stabilize the situation enough to
avoid a precipitous default. In a very real sense, however, it was the actions of the
United States that created the immediate crisis, and not some event or pattern of events
in the developing world itself.

Similarly, this debt crisis aggravated an already bad situation with respect to the
ability of the developing countries to pay back their loans. Many of the developing
countries were extremely poor prior to the crisis, which was one reason why they took out
such massive debts in the first place. There was no evidence, before 1973, that this
condition of relative poverty was changing in any but a few of the developing countries,
such as the newly industrializing countries of South Korea, Singapore, and Taiwan. In
fact, most of the traditional measures of economic development suggest that most
developing countries were falling farther behind the advanced industrialized countries at
an increasingly faster rate.

The developing countries will always be relatively poorer than the advanced
industrialized countries as long as they rely heavily on primary commodities, such as
copper and rubber, for export earnings. Trade may be a stimulus to growth, but trade is
not an effective way to overcome relative poverty if the values for primary commodities
fail to keep pace with the value of manufactured products. This relationship between the
values of manufactured exports and the values of primary commodities exports (the terms of
trade) has been carefully examined by many economists, and some of them, such as Prebisch,
have argued that the international division of labor is systematically biased against the
interests of countries that rely heavily on the export of primary products. This debate,
which has been extended into what has been termed a theory of dependency, is a difficult
one to resolve with clear empirical evidence. Some recent evidence, however, suggests that
raw materials producers have indeed suffered relative economic losses in the twentieth
century. Enzo R. Grilli and Maw Cheng Yang analyzed the terms of trade between primary
commodities and manufactured goods since 1900 and found that "the prices of all
primary commodities (including fuels) relative to those of traded manufactures declined by
about 36 percent over the 1900-86 period, at an average annual rate of 0.5 percent."25

Thus, the developing countries are at a structural disadvantage compared to the
advanced industrialized countries. The newly industrializing countries of East Asia are
the exceptions that prove this rule. Because they have been able to expand manufactured
exports, they have improved their relative economic situation tremendously in recent
years. Other countries have been less successful, and the recent resurgence of
protectionist measures against manufactured products from the developing world will make
this type of transition only more difficult. Ultimately, the solution to the debt crisis,
and the underlying poverty that spawned it, must address this terms of trade issue. This
imperative will be discussed in further detail below. Clearly, however, the solutions to
the debt crisis will require a perspective that looks at the problem as more than a
temporary aberration precipitated by bad luck and incompetence.

What are the Costs of the Debt Crisis?

This explosion of debt has had numerous consequences for the developing countries, but
this section will focus on only three consequences: the decline in the quality of life
within debtor countries, the political violence associated with that decline, and the
effects of the decline on the developed world. The next section of this chapter will
explore separately the most publicized cost of the debt crisis, the possibility that it
might have instigated a global banking crisis.

The first, and most devastating, effect of the debt crisis was, and continues to be,
the significant outflows of capital to finance the debt. According to the World Bank:
"Before 1982 the highly indebted countries received about 2 percent of GNP a year in
resources from abroad; since then they have transferred roughly 3 percent of GNP a year in
the opposite direction."26 In
1988, the poorer countries of the world sent about $50 billion to the rich countries, and
the cumulative total of these transfers since 1984 is nearly $120 billion.27 The problem became so pervasive that even agencies whose
ostensible purposes included aiding the indebted countries were draining capital: in 1987
"the IMF received about $8.6 billion more in loan repayments and interest charges
than it lent out."28 The IMF has
since reversed the flow of money in a more appropriate direction, aided principally by the
global decline in interest rates, as well as by some success in renegotiating some of the
loan agreements.

This capital hemorrhage has severely limited prospects for economic growth in the
developing world and seriously skewed the patterns of economic development within it. The
implications for growth are summarized by Table 17.3.

Table 17.3 / Effects of External Debt on Economic Growth and Trade

Gross Domestic Product(Average Yearly Growth)

Terms of Trade(1987=100)

1965-80

1980-90

1985

1990

Algeria

**

3.1

174

99

Argentina

3.4

-0.4

110

112

Bolivia

4.4

-0.1

167

97

Brazil

9.0

2.7

92

123

Bulgaria

**

2.6

**

**

Congo

6.2

3.6

145

99

Cote d'Ivoire

6.8

0.5

110

80

Ecuador

8.8

2.0

153

109

Mexico

6.5

1.0

133

110

Morocco

5.7

4.0

88

86

Nicaragua

2.5

-2.2

111

110

Peru

3.9

-0.3

111

78

Poland

**

1.8

94

103

Syria

9.1

2.1

125

87

Venezuela

3.7

1.0

174

164

Averages

6.3

1.7

118

101

Source: The World Bank, World Development Report, 1992 (Washington,
DC: The World Bank, 1992), Tables 2 and 14, pp. 220-221 and 244-245.

The decline in average growth, from 6.3 percent a year to 1.7 percent a year, is even
worse than it seems. Given the rate of population increase in these countries, a 1.7
percent increase in GDP translates into a net decline in per capita GDP. In other words,
the populations of these countries were significantly worse off economically during the
period of the debt crisis; and this decline further jeopardizes opportunities for future
economic growth given its implications for domestic demand and productive investment. The
terms of trade statistics, which reflect the relative movement of export prices to import
prices, are similarly grim: developing countries are getting much less in return for their
exported products when compared to their costs for imported items. In short, these
countries must export even more of their products in order to maintain current levels of
imports. The total effects for the quality of life in the highly indebted countries were
summarized by the United Nations Conference on Trade and Development:

Per capita consumption in the highly-indebted countries in 1987, as measured by
national accounts statistics, was no higher than in the late 1970s; if terms of trade
losses are taken into account, there was a decline. Per capita investment has also fallen
drastically, by about 40 percent between 1980 and 1987. It declined steeply during
1982-83, but far from recovering subsequently, it has continued to fall.29

Jeffrey Sachs portrays the situation in even starker terms:

As for the debtor countries, many have fallen into the deepest economic crisis in their
histories. Between 1981 and 1988 real per capita income declined in absolute terms in
almost every country in South America. Many countries' living standards have fallen to
levels of the 1950s and 1960s. Real wages in Mexico declined by about 50 percent between
1980 and 1988. A decade of development has been wiped out throughout the debtor world.30

Sachs is not overstating the case. Before the debt crisis, global poverty had reached
staggering proportions, as described above. One can document the extent of poverty in the
world by pointing out statistics on gross national product, per capita income, or the
number of telephones per thousand in a particular country. But these statistics obscure
too much in their sterility. In 1988, one billion people were considered chronically
underfed. Millions of babies die every year from complications from diarrhea, a phenomenon
that typically causes mild discomfort in the advanced industrialized countries. Millions
of people have no access to clean water, cannot read or write their own names, and have no
adequate shelter.

And this misery will only continue to spread. The debt crisis has a self-reinforcing
dynamic. Money that could have been used to build schools or hospitals in developing
countries is now going to the advanced industrialized countries. As a consequence, fewer
babies will survive their first year; those that do will have fewer opportunities to reach
their intellectual potential. To raise foreign exchange, developing countries are forced
to sell more of their resources at reduced rates, thereby depleting nonrenewable resources
for use by future generations. Capital that could have been used to build factories and
provide jobs is now sent abroad; as a result, the problems of unemployment and
underemployment will only get worse in poor countries.

A second effect of the decline in living standards in the heavily indebted countries
concerns the increased potential for political violence. There have been over twenty
violent protests in recent years specifically against the austerity measures imposed by
the IMF, with over 3,000 people killed in those protests."31 The most recent outburst occurred in Venezuela, where about
300 people were killed. Harold Lever posed the problem well in 1984:

Will it be politically feasible, on a sustained basis, for the governments of the
debtor countries to enforce the measures that would be required to achieve even the
payment of interest? To say, as some do, that there is no need for the capital to be
repaid is no comfort because that would mean paying interest on the debt for all eternity.
Can it be seriously expected that hundreds of millions of the world's poorest populations
would be content to toil away in order to transfer resources to their rich rentier
creditors?32

Political violence will only continue in the future, but its implications are hard to
predict. Political instability may make it more difficult for democratic regimes to
survive, particularly in Latin America, and may lead to the establishment of authoritarian
regimes. Similarly, popular pressures may lead to regimes radically hostile to market
economies, thus setting the stage for dramatic confrontations between debtor countries and
the external agencies that set the terms for debt rescheduling or relief. Finally,
political violence can spill over into international security issues. One can only imagine
what sustained political conflict in Mexico would do to the already troubling issues of
drug smuggling and immigration between Mexico and the United States. Debt-related issues
complicated political relations between the United States and the Philippines over the
military bases, and the extraordinary impoverishment in Peru (a decline in real GNP of
between 15 to 25 percent from September 1988 to September 1989) has certainly led to an 31
increase in the drug-related activities of the Shining Path.33

Debtor governments will find themselves forced to demand certain concessions on debt
repayment in order to maintain their legitimacy, and these concessions will invariably be
cast at least in terms of lower and more extended payments, if not reduction or outright
debt forgiveness. If the debt crisis is not resolved in terms that address the inevitable
political consequences of declining living standards, then the prognosis for recovery is
dim, even if debtor governments, banks, and the international lending agencies agree upon
acceptable financial terms. The political dynamics of the debt crisis must be considered
an integral part of the solution: to ignore the violence and protest as less important
than the renegotiated interest rates will produce agreements that have little hope of
success.

A final cost of the debt crisis has been one experienced by the developed countries
themselves, in particular by the United States. Increasing poverty in the developing
countries leads to a reduction of economic growth in the developed countries. The debtor
countries have been forced to undergo a dramatic decline in imports in order to increase
the foreign exchange earnings needed to pay back their debts. The decline in the average
annual growth rate for imports of the seventeen most heavily indebted countries is
dramatic: the average annual growth rate for these countries in 1965-80 was 6.3 percent;
in 1980-87, that figure had fallen to minus 6 percent, for a total shift of minus 12.3
percent.34 One estimate is that the
seventeen most heavily indebted nations decreased their imports from the developed world
by $72 billion from 1981 to 1986.35

The United States has been profoundly affected by this decline in imports because most
of its exports to the developing world have, historically, gone to the Latin American
states most seriously affected by the debt crisis. The United Nations Conference on Trade
and Development suggests that this decline in U.S. exports is a more important explanation
for U.S. trade difficulties than for the deficits of other countries:

Because of this import compression by the highly-indebted developing countries, United
States exports to them actually declined by about $10 billion between 1980 and 1986.... As
a result, the United States recorded a negative swing in its trade balance of about $12
billion between 1980 and 1986; the corresponding negative swings for the other developed
market economy countries were much smaller: about $3 billion for Japan, $2.4 billion for
the Federal Republic of Germany and $1.6 billion for the other EEC countries.36

These declines seriously aggravated an already bad trade situation for the United
States. The absolute declines were quite large; and if one extrapolates losses from an
expected increase for export growth based on recent history, the declines are quite
significant. Richard Feinberg translated the export loss to the United States in terms of
lost jobs when he testified before the Senate: ". . . roughly 930,000 jobs would have
been created if the growth trend [of U.S. exports to the Third World] of the 1970s had
continued after 1980. In sum, nearly 1.6 million U.S. jobs have been lost due to recession
in the Third World."37

This final point deserves more sustained attention than it has yet received: it is also
in the interests of the advanced industrial nations to seek an equitable solution to the
debt crisis. No one's long-term interests are served by the increasing impoverishment of
millions of people. The financial health and stability of the richer countries depends
crucially on debt-resolution terms that allow and foster the economic growth and
development of the poorer countries.

How Real was the Threat of an International Banking
Collapse?

The global cost most talked about in lending circles was that of a massive default by
the debtor countries, which might have had the effect of unraveling the international
financial system. The point at which the debt crisis actually made it to the front pages
of newspapers in the advanced industrial countries was in 1982, when it became clear that
Mexico was unable to meet its financial commitments. The size of the Mexican debt, coupled
with the overexposure (lending in excess of capital assets) of the private banks that had
provided loans to Mexico, raised the possibility of a widespread banking collapse,
reminiscent of the bank failures in the 1930s. Table 17.4 gives some idea of the extent of
overexposure in 1982.

Table 17.4 / Exposure as a Percentage of Capital, Major Banks, end of 1982

The threat of a banking collapse was perhaps overstated at the time since these types
of measures only imperfectly reflect the vulnerability of banks to a profound crisis of
confidence. Nonetheless, it was clear that some of the most important banks in the United
States stood to lose a great deal of money if one of the major debtor nations defaulted on
its loans. Under even normal conditions, a banking collapse is always possible since banks
rarely have enough capital to cover their commitments. Indeed, it is generally considered
inefficient to maintain this much available capital. Banks generally have nothing to fear
from their overcommitment of resources since it is almost never the case that people wish
to question the financial integrity of banks. In 1982, however, it became clear that
psychological confidence in the banking system had lost some important underpinnings, and
only the rapid intervention of governmental institutions averted events that might have
completely undermined public confidence. Since that time, most private banks have stopped
lending money to developing countries and have increased their reserve holdings to offset
any potential losses from a major loan default. At the end of 1982, the nine major U.S.
banks had lent out over 287 percent of their capital to the developing countries; by the
end of 1988, that percentage had dropped to 108 percent.38

In addition, the major private lenders have increased their reserve holdings to cover
possible losses on their loan accounts. Citicorp first announced that it was enlarging its
loss reserve in 1987, and the other major banks quickly followed suit.39

The net effect of these two actions - the sharp reduction in loan exposure and the
creation of reserves against potential losses - has insulated the major banks from any
threat of a banking collapse precipitated by a widespread default on loans by developing
countries. Indeed, these actions have been partially responsible for the revival of the
stock prices of these banks, signaling renewed investor confidence in the banks, as well
as supplying new capital to offset the equity losses generated by the creation of the
reserve holdings. The strengthened position of the major banks led William Seidman,
chairman of the Federal Deposit Insurance Corporation, to assert in 1989 that the banks
would remain solvent even if they were forced to "write-off 100 percent of their
outstanding loans" to the six largest debtor countries.40 Indeed, talk of the "debt crisis" was rarely heard
in the developed world in the early 1990s, even though the total amount of debt owed by
developing countries steadily increased.

The newly protected position of the banks alleviates the threat of a collapse, but
leaves the developing countries with fewer sources of external assistance. Banks are not
apt to enter into any new or extensive commitments to developing countries now that they
do not necessarily need to protect the loans already made. If there were a serious
downturn in global economic activity that would further imperil the ability of the
developing countries to raise the money to pay back their debts, the only alternative for
the debtors would be public assistance, either bilateral or multilateral. In short, while
the gains from debt repayment will still be private, the costs will be shifted onto the
public sector.

This shift now appears to be the strategy of the major banks. In response to new
proposals for debt reduction, the banks, represented by an organization called the
Institute for International Finance, have demanded certain conditions for accepting these
proposals. In the words of Walter S. Mossberg of The Wall Street Journal, "the
banks indicated they would be willing to make major debt reductions and new loans only if
they receive new loan guarantees, tax breaks, and other financial sweeteners from the
U.S., other countries, the World Bank and the International Monetary Fund."41 The institute also asserted that
"any government effort to force debt forgiveness would be contested in the courts' as
'an unconstitutional taking of property' unless the government pays the banks
compensation."42 The truculent
tone of this position confirms that the banks no longer fear an imminent collapse of the
international financial system.

Solutions

One fact is undeniable: Someone is going to have to pay for past debts. It could be the
people in debtor countries, or the banks, or the people in advanced industrial countries.
Most likely it will be some combination of these three groups. In the last ten years,
there have been a variety of proposals which, unfortunately, usually reflect only the
special interests of the groups proposing them. Generally speaking, these solutions fall
into three categories: repudiation, minor adjustments in repayments, or reduction.

Debt repudiation, in the sense of a unilateral cessation of repayment, occurred in a
number of countries: Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Honduras,
Nicaragua, Panama, and Peru.43 With the
exception of the Peruvian cessation, however, most of these actions have been taken with
assurances that the stoppages were only temporary. Peru announced that it was unilaterally
limiting its debt repayments to a percentage of its export earnings; and since Peru took
this action, other nations have indicated that they will act similarly. There have been no
serious proposals for a widespread and coordinated repudiation of global debt.

The economist Jeffrey Sachs offers several reasons for this absence of a general
repudiation.44 First, debt repudiation
is a dramatic and abrupt act. Most nations would prefer to defer such decisions as long as
there are advantages to muddling through, and growth prospects are sufficiently ambiguous
to make this muddling a viable course. Second, debtor countries fear retaliation from
commercial banks. If the banks were to cut off nondebt related activities, such as trade
credits, the situation could be made even worse. Third, the debtor countries fear
retaliation from creditor governments and multilateral lending agencies. Grants from
development banks could be affected, and trade relations would probably be seriously
disrupted. Finally, the leaders of most of the debtor countries have interests in
maintaining good relations with the richer countries, and repudiation would jeopardize
these interests.

Repudiation would also seriously disrupt global economic relations, probably far beyond
the immediate losses of the debts themselves. Retaliations would follow, because it would
be politically impossible for lenders not to react, and because there would be a conscious
effort to warn other potential defaulters against similar action. The escalation of
economic warfare would have the effect of sharply reducing international economic
interactions in trade, investment, and exchange. Such an outcome is in no one's interest.

The vast bulk of activity since 1982 has involved adjusting the timing and method of
repayment. The number of specific proposals is bewildering.45One can read about debt-equity swaps, in which businesses or
properties in the debtor country are purchased at a discount by the banks as partial
repayment; debt-for-debt swaps, where bonds are offered as discounted repayments; exit
bonds, which are long-term bonds tendered essentially as take-it-or-leave-it offers to
creditors who have no interest in investing any further and wish to cut their losses; or
cash buy-backs, where the debtor country simply buys back its loan at a deep discount.46 Some of these proposals, notably the
debt-for-nature swaps, where the debtor country promises to protect the environment in
return for purchases of the debt by outside groups, are creative and could have important
effects.

This array of proposals is referred to as a "menu" approach to debt
repayment, and its logic is superficially sound. It was the logic of the plan offered by
Secretary of the Treasury James Baker in 1985. By providing a number of different options,
repayments can be tailored to the specific circumstances of a country, thereby easing the
burden. Critical to the success of the menu approach is the assumption that countries will
"grow out of" their debt. Yet, the evidence suggests that this assumption is not
entirely sound. This approach further assumes the repayment of debts on terms that are
essentially dictated by the creditors. No lender is obligated to accept any one of these
possibilities. Moreover, the opportunities for swaps and buy backs are limited: there are,
after all, a relatively small number of investment opportunities in poorer countries, and
the debt crisis itself has further limited those possibilities. Finally, some of these
swaps can actually increase the drain on the capital of a country, particularly if profit
remittances on successful investments turn out to be very high.

The final proposals have to do with debt reduction, and these only became a real
possibility in the spring of 1989 with the announcement of a new plan, dubbed the Brady
Plan, after U.S. Secretary of the Treasury Nicholas Brady. The plan originally called for
a total reduction of about 20 percent of global debt, with the IMF and the World Bank
offering guarantees for the repayment of the other 80 percent of the debt.47 Since 1989, Argentina, Brazil, Costa Rica, Mexico, Morocco,
the Philippines, and Venezuela have reached agreements concerning their debts under the
auspices of the Brady proposal.48 This
approach recognizes that many of the menu approaches were, in fact, schemes for debt
reduction on a case-by-case basis. This formal recognition of the need for systematic debt
reduction is a hopeful sign, but the plan clearly does not go far enough.49 In market terms, developing-country debt is already selling
on the secondary market at about thirty-five cents to the dollar.50 In other words, debt reduction has already occurred in the
marketplace, and any plan that incorporates reductions must take this into account.

There are some serious problems with debt reduction. Debt reduction could reduce the
incentive for debtor nations to make economic changes that could lead to greater
efficiency. Or, it could set a precedent that would have the effect of reducing, or even
eliminating, the possibility for any future bank lending for economic development
projects. Finally, debt reduction could have the effect of saddling public lending
agencies, like the World Bank, with enormous burdens, thereby vitiating their future
effectiveness.

These concerns are genuine. Counterposed to these possibilities, however, is the stark
reality of hundreds of millions of people living in desperate conditions with no hope of
relief in the near- or medium-term future. Any plan for easing the debt burden, therefore,
must try to incorporate a number of legitimate, but competing, concerns of varying
importance. First, the repayment of the debt itself has ceased to be the central concern.
Private banks obviously have an interest in the repayment of the debt and, to the extent
possible, these interests must be accommodated. But the security of the international
banking system is no longer at risk, and that, as a legitimate public concern, can no
longer dictate possible necessary actions. The central concerns now are the
reestablishment of economic growth in the heavily indebted countries, the effective and
meaningful distribution of that growth into all sectors of their societies, and their
reintegration into the international economic system. Only after sustained economic growth
returns to the heavily indebted countries can the international community even begin to
determine manageable rates and methods of debt repayment.

Second, the International Monetary Fund must fundamentally reassess its policies.
Programs of structural adjustment may be appropriate for the original purpose of the
IMF-to assist nations having temporary difficulties in maintaining currency values because
of transient balance-of-payments difficulties. But these programs are profoundly
counterproductive in current circumstances and, indeed, are guided by a wildly
inappropriate perspective. The inflows of capital to the IMF from the heavily indebted
countries were more than a gross embarrassment; they were conclusive evidence of the IMF's
misunderstanding of the causes of the debt crisis. The IMF should shift its perspective to
more creative or appropriate ways of stabilizing or depressing interest rates rather than
raising them, or ways to prevent capital flight from developing countries, or any number
of issues that concern the specific conditions of economic growth. The mechanical
application of a "model" of economic growth is wrongheaded."51

Third, the resolution of the debt crisis depends upon a clear recognition that much of
the debt, as formally constituted, will not, because it cannot, be repaid. Some countries,
such as those in sub-Saharan Africa, ought not to repay their debts. Other countries,
particularly the heavily indebted ones, can pay something on their debts, and perhaps the
appropriate percentage is about half. Viewed in this light, the real question becomes one
of allocating the costs of this nonpayment of debts. The current emphasis of forcing the
poor to pay with broken lives and broken spirits is demeaning to both rich and poor, and
ill-serves the long-term interests of rich as well as poor.

Finally, there are genuine issues of responsibility that deserve to be made explicit.
The debt "crisis" is only a symptom of an international economic system that
tolerates growing and abysmal poverty as a normal condition. This need not, and should
not, be the case. The developed countries have a responsibility to create conditions
whereby the poorer countries can interact more productively in international economic
activities: their single most important contribution to this end might be in the area of
reducing trade restrictions on the products of poorer countries. Similarly, the developing
countries have a responsibility to see that money is more effectively utilized within
their own borders. The obscene personal profits accumulated by such leaders as Marcos of
the Philippines and Mobutu of Zaire should not be fostered by the strategic interests of
other countries. The banks should also face up to the fact that their single-minded
pursuit of profits almost led them to the brink of bankruptcy. The lesson to be learned
from this experience is that for economic growth to be sustained, close attention must be
paid to the mutual interests of all parties involved.

Notes

We wish to thank Stephen Ellenburg, Anthony Lake, Tammy Sapowsky, Daniel
Thomas, Sharon Worcester, and Diane C. Yelinek for all their assistance in the writing of
this chapter.

2 There are a myriad of
classifications used to describe "the most severely indebted countries." The
original classification was used in the context of the initiative of U.S. Secretary of the
Treasury James Baker, which identified the following nations: Argentina, Bolivia, Brazil,
Chile, Colombia, Cote d'Ivoire, Ecuador, Mexico, Morocco, Nigeria, Peru, Philippines,
Uruguay, Venezuela, and Yugoslavia. This classification is still used by the International
Monetary Fund. The World Bank, however, added Costa Rica and Jamaica in 1989. The World
Bank, in its 1992 World Development Report, lists the following countries as
"severely indebted middle-income countries": Algeria, Argentina, Bolivia,
Brazil, Bulgaria, Congo, Cote d'Ivoire, Ecuador, Mexico, Morocco, Nicaragua, Peru, Poland,
Syrian Arab Republic, and Venezuela. The different lists make comparisons over time of the
status of heavily indebted countries very difficult.

3 For an analysis of
the economic catastrophe faced by many African nations, see Richard J. Barnet, "But
What About Africa?: On the Global Economy's Lost Continent," Harper's, Vol.
280, no. 1680 (May 1990), pp. 43-51.

4 The World Bank, World
Development Report, 1989 (Washington: The World Bank, 1989), Table 24, P. 211.

11Helen Wallace,
"Health Care of Children in Developing Countries," in Health Care ofWomen
and Children in the Developing World, op. cit., p. 7

12William R. Cline, International
Debt and the Stability of the World Economy, Policy Analyses in International
Economics, No. 4 (Washington: Institute for International Economics, September 1983), p.
31.

13 Jeffrey Sachs cites
Citicorp chairman Walter Wriston as justifying the heavy bank activity with the
observation that "countries never go bankrupt." Jeffrey D. Sachs,
"Introduction," in Developing Country Debt and the World Economy, edited
by Jeffrey D. Sachs, a National Bureau of Economic Research Project Report (Chicago: The
University of Chicago Press, 1989), p. 8. Sachs also points out Wriston's self-interest in
this belief, as international operations accounted for 72 per cent of Citicorp's overall
earnings in 1976.

15 For an excellent
analysis of the Mexican debt crisis, see Adhip Chaudhuri, "The Mexican Debt Crisis,
1982," Pew Program in Case Teaching and Writing in International Affairs, Case #204
(Pittsburgh, PA: University of Pittsburgh, 1988).

20 The Philippines was
one such example. See Penelope Walker, "Political Crisis and Debt Negotiations: The
Case of the Philippines, 1983-86," Pew Program in Case Teaching and Writing in
International Affairs, Case #133 (Pittsburgh: University of Pittsburgh, 1988). See also
Tyler Bridges, "How Our Loan Money Went South," Washington Post, 19 March
1989, P. C2. One should not make too much out of such examples without also remembering
that political corruption, such as the savings and loan scandals in the United States,
afflicts the rich as well as the poor.

37Statement by Richard
E. Feinberg, vice president, Overseas Development Council, before the subcommittee on
International Debt of the Committee on Finance, United States Senate, Washington, DC, 9
March 1987, mimeo, pp. 6-7.

39 Sarah Bartlett,
"The Third World Debt Crisis Reshapes American Banks," New York Times, 24
September 1989.

40 As quoted in
Jeffrey Sachs, "A Strategy for Efficient Debt Reduction," op. cit., p. 21. For
statistics on how the values of bank stocks increased dramatically at this time, see Mark
Fadiman, "Bad News is Good News for Big Bank Stocks," Investor's Daily, 27
September 1989.

45 For a comprehensive
analysis of many of the proposals, see Analytical Issues in Debt, edited by Jacob
A. Frenkel, Michael P. Dooley, and Peter Wickham (Washington: International Monetary Fund,
1989).

49 There have been
debt reductions brought about in Mexico, Brazil, and Argentina (among other countries)
under the terms of the Brady Plan. Nonetheless, while the economic outlook in 1992 seemed
hopeful, there is still doubt about the actual effects of the Brady Plan. See Jorge C.
Castaneda, "Mexico's Dismal Debt Deal," New York Times, 25 February 1990,
P. F13; Nathaniel C. Nash, "Latin Debt Load Keeps Climbing Despite Accords," New
York Times, 1 August 1992, p. Al; and Thomas Kamm, "Brazilian Accord Puts End to
Debt Crisis in Region, but Not to Economic Troubles," Wall Street journal, 10
July 1992.

51 The International
Monetary Fund denies that it applies a uniform "model" of structural adjustment,
and, in a strict sense, this is certainly true: there is a great degree of variation in
the plans agreed upon by the IMF and different countries. But, in a larger sense, the
plans all stress similar objectives, which by and large conform to a general
pattern of demand reduction and reduced government spending. See IMF Conditionality,
1980-91, a white paper researched and prepared by the staff of the IMF Assessment
Project (Arlington, VA: Alexis de Tocqueville Institution, 1992); Karim Nashashibi, et
al., The Fiscal Dimensionsof Adjustment in Low-Income Countries, Occasional
Paper No. 95 (Washington: International Monetary Fund, April 1992); and Francois
Bourguignon and Christian Morrisson, Adjustmentand Equity in Developing
Countries: A New Approach (Paris: Organisation for Economic Co-Operation and
Development, 1992).

Source: Klare, Michael T., and Daniel C. Thomas, World Security: Challenges
for a New Century (New York: St. Martin's Press, 1994) p. 332-355.